In November of each year, the CFO of Knowles Electronics Sdn. Bhd. begins the financial forecasting process to determine the firm’s projected needs for new financing during the coming year. Knowles is a small electronics manufacturing company located in Penang, Malaysia. The CFO begins the process with the most recent year’s income statement, project sales growth and finally the additional earnings he can expect to retain and reinvest in the firm. The firm’s income statement for 2019 is shown in the corresponding table (in RM000):

The electronics business has been growing rapidly over the past 18 months as the Malaysian economy recovers, and the CFO estimates that sales will expand 15 percent in the next year. In addition, he estimates the following relationships between each of the income statement expense items and sales:

Note that for the coming year both depreciation expense and interest expense are projected to remain the same as in 2019.

a. Estimate Knowles net income for 2020 and its addition to retained earnings under the assumption that the firm leaves its dividends paid at the 2019 level.

b. Recalculate Knowles net income and addition to retained earnings if sales grow at 30 percent over the coming year.
However, this scenario requires addition of new plant and equipment in the amount of RM120,000, which increases annual depreciation to RM68,000 per year, and interest expense rises to RM18,000.

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Income Statement (RM000) Sales Cost of goods sold Gross profit Operating costs Depreciation expense YEAR ENDED DECEMBER 31, 2019 RM1,600 (1,080). RM 520 (230) (60) Net operating profit RM 230 Interest expense (12) Earnings before taxes RM 218 Taxes Net income (24) RM 194